THE CENTRAL AND EASTERN EUROPEAN OPPORTUNITY
Can CEE/Romania Serve Western Europe Better Than China?

Bucharest - June 20, 2007 – Low-cost countries such as China and India as well as Romania and other CEE countries are changing the international competitive landscape. This happens so quickly and profoundly that every industrial company needs to reexamine its overall operating strategy and be prepared to alter it radically, according to a new study by The Boston Consulting Group (BCG).

Europe is facing a fundamental reshaping of its manufacturing landscape. Given the dramatic labor savings possible within Europe, at a relatively low transportation cost penalty, large portions of industrial production will potentially still move from Western to Central & Eastern European countries. According to BCG's study, Central Europe is the most logical production location for companies serving the European market.

"For every value-added step, companies should determine the optimal location. Romania and the other CEE countries hold potentially significant comparative advantage for many industries," said BCG Partner Kevin Waddell, co-author of the regional study and head of the firm's CEE Operations practice.

The EU accession of CEE countries over the past 3 years has brought up the concern that existing wage differentials towards Western Europe will now quickly disappear, possibly rendering further investments unattractive. The study points out that, contrary to what many have feared, the cost advantage offered by LCCs will persist in the mid-term, not evaporate. It is reasonable to expect that the significant wage differentials will not change fast, which has also been the experience after the EU accession of Portugal and Greece in 1986.

 

In many ways CEE is as attractive as China to Western Europe's companies

CEE countries compare favorably with China and other rapidly developing economies in terms of cost-competitiveness.

Cost-competitiveness
"Today, for many industries, the costs to serve Western European markets from CEE or China are essentially equivalent. Companies need to look at their sourcing decisions for each product line or service, taking into consideration a number of strategic factors, including local market potential, opportunities for capitalizing on local talent, and the general business environment, especially business risks," says adds Kevin Waddell, Head of Warsaw office.

Labor in CEE countries typically costs 4 to 10 times less than in Western Europe, and this gap is expected to remain largely intact for the foreseeable future. Moreover, while blue-collar labor costs on average three times less in China than in CEE, this difference works out to be nearly negligible for many products if their total cost is considered. When you factor in either China's transportation penalty or the risks associated with lengthy and volatile supply chains that stretch half-way around the globe, in many industries the CEE region actually has an advantage in total landed cost.

A favorable business environment
The major countries in the CEE region represent a relatively safe environment for investing. Also affecting the general business environment is basic infrastructure, including transportation and telecommunications. While the quality of infrastructure varies across the CEE region, these countries can generally offer more convenient, faster, and cheaper communication links with Western Europe than can China. Other factors are less tangible but highly important; these include the ease of managing plants that are in the same time zone with the company's headquarters, the cost and ease of travel between sites, and the effectiveness of management across cultures that are familiar with each other's languages, business practices, and values.

Investment in CEE should take advantage of the excellent productivity/ cost trade-off for local research and production, of the highly skilled and cost-competitive workforce or of the growing class of middle-income consumers. In reverse, Western Europe should help CEE further develop their own infrastructure to enable further growth.

 

Romania is well positioned to combine general CEE advantage with country specifics

Among CEE countries, Romania is well positioned in attracting foreign investments by combining general CEE advantages with country specifics. Romania should maintain to be a profitable cost production platform for Western Europe, with extensive local supplier base and home of service oriented and high value added industries. Statistics show an increase in high-value added Romanian exports to Western Europe while traditional sector like textiles, leather are stagnating.

Excellent talent pools
CEE provides a pool of skilled laborers and qualified engineers who are generally more educated than those in other LCCs. This reflects in the gradual orientation of FDI in the region towards a more sophisticated area, like R&D in automotive for example. Likewise, Romanian specific factors, such as excellent talent base combined with geographic location create a good environment for transferring high value added activities to Romania such as R&D.

However there are areas where Romania has a handicap compared to its peers in the region: infrastructural developments, a more effective administration and a further increase in the capabilities of local suppliers would substantially increase the attractiveness of the country from an economic standpoint. At the same time, economic growth is leading to first labor shortages, especially in sectors like construction, IT and tourism.

Growing market opportunities
The CEE region and Romania show growing market opportunities. Even if the CEE region is much smaller than China, with 380 million people vs. 1.3 billion, these consumers represent a market that is only beginning to be tapped. For Romania, as personal incomes of citizens grow, the country becomes itself a highly attractive consumer market.

 

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About:

The Boston Consulting Group is a general management consulting firm and a global leader in business strategy. Founded in 1963, the firm now has 64 offices in 38 countries. Its focus is corporate and business strategy as well as operational and systems strategy and implementation. It serves companies in all major industries and geographies, notably in main developing countries.

Authors:	Kevin Waddell, Partner and Managing Director, BCG Warsaw Head of CEE Operations Practice
	Peter Jansen, Managing Partner of the "Bucharest Consulting Group".

Bucharest Consulting Group offers consultancy services in the field of strategy and general management to local and international medium-sized and large companies in Romania.

For more information contact:

Peter Jansen at +40 (0)72 264 69 94